Japan’s Backward Recovery

Shoppers crowd the Ameyoko shopping district in Tokyo in December. Statistics indicate that consumption rather than exports has been driving growth in Japan.

Reuters

Japan’s current economic recovery is different from any other period of expansion in recent years. Why? Because it’s being led by domestic demand.

Economists say that in the past, the world’s third-largest economy expanded when demand for Japanese products abroad grew, encouraging companies to produce more. That in turns lifted the overall economy, benefiting consumers.

This time, things are backward. Since Japan’s economy started expanding at the end of 2012, output has rebounded on consumer demand for items such as smartphones and houses. The volume of exports, however, has not recovered much.

That’s created a difference between output and export volume growth, two indicators that typically move largely in tandem.

SMBC Nikko Securities economist Koya Miyamae said the pickup in export volumes has lagged despite the yen weakening against major currencies because of production moving out of Japan and because Japan “hasn’t regained” the share of global exports it lost in the aftermath of the 2011 earthquake and tsunami.

Economists also say continuing weakness in the world economy outside of the U.S. has also dampened demand for Japan’s exports.

In 2013 production by Japanese companies fell 0.8% from the previous year, according to economy ministry figures, compared with a 1.5% fall in the total volume of exports, according to finance ministry data.

But will the unusual decoupling of production and export growth in Japan continue? Many economists say no.

Daiwa Institute of Research economist Masahiko Hashimoto says a rise in export volumes will be necessary if Japan’s growth is to pick up further.

“It’s hard for Japan just to grow on domestic demand alone, with the population falling. There’s also not a big necessity for new infrastructure,” he said. “Japan will have to incorporate the growth of emerging countries.”

A rise in exports will also boost Japanese firms’ profits, in turn encouraging them to raise wages, and sparking more consumer spending, he added.

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